-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RRM4LumM2JrQtpbsiIhYhvDmsLNTnGRDssELoT8bL1LsPUW2V6hi85dQqzGxkdbe MxTxn4D4g+o2PbTTEWC9Cg== 0000887343-96-000011.txt : 19960814 0000887343-96-000011.hdr.sgml : 19960814 ACCESSION NUMBER: 0000887343-96-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLUMBIA BANKING SYSTEM INC CENTRAL INDEX KEY: 0000887343 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 911422237 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20288 FILM NUMBER: 96611416 BUSINESS ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 BUSINESS PHONE: 2063051900 MAIL ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996. / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________. Commission File Number 0-20288 COLUMBIA BANKING SYSTEM, INC. (Exact name of small business issuer as specified in its charter) Washington 91-1422237 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1102 Broadway Plaza Tacoma, Washington 98402 (Address of principal executive offices) (Zip Code) (206) 305-1900 (Issuer's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of the issuer's Common Stock outstanding at July 31, 1996 was 3,464,952. TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION Page Item 1. Financial statements Consolidated Statements of Operations - three months and six months ended June 30, 1996 and 1995 2 Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 3 Consolidated Statements of Shareholders' Equity - twelve months ended December 31, 1995 and six months ended June 30, 1996 4 Consolidated Statements of Cash Flows - six months ended June 30, 1996 and 1995 5 Notes to consolidated financial statements 6 Item 2. Management Discussion and Financial Review 8 PART II -- OTHER INFORMATION Item 4. Submission of matters to a vote of security holders 14 Item 6. Exhibits and reports on Form 8-K 15 Signatures 15 1 CONSOLIDATED STATEMENTS OF OPERATIONS Columbia Banking System, Inc.
Three Months Ended Six Months Ended June 30, June 30, (in thousands except per share) 1996 1995 1996 1995 - ----------------------------------------------------------------------------- Interest Income Loans $ 8,745 $ 7,395 $16,943 $13,948 Investment securities 301 571 Securities available for sale 416 49 826 99 Deposits with banks 150 30 328 69 - ----------------------------------------------------------------------------- Total interest income 9,311 7,775 18,097 14,717 Interest Expense Deposits 3,798 3,225 7,593 5,990 Federal Home Loan Bank advances 447 408 884 664 Other borrowings 61 66 125 138 - ----------------------------------------------------------------------------- Total interest expense 4,306 3,699 8,602 6,792 Net Interest Income 5,005 4,076 9,495 7,925 Provision for loan losses 430 300 760 600 - ----------------------------------------------------------------------------- Net interest income after provision for loan losses 4,575 3,776 8,735 7,325 Noninterest Income Service charges and other fees 597 464 1,148 905 Mortgage banking 148 103 308 191 Credit card fees and other 563 383 1,017 737 - ----------------------------------------------------------------------------- Total noninterest income 1,308 950 2,473 1,833 Noninterest Expense Compensation and employee benefits 1,808 1,865 3,627 3,737 Occupancy 800 663 1,616 1,344 Professional Services 154 104 278 220 Advertising and promotion 194 207 374 338 Printing and supplies 103 90 192 192 Regulatory premiums and assessments 120 160 184 320 Data processing 205 153 363 295 Gains on, and net cost of, real estate owned (154) (264) Other 1,467 1,036 2,734 1,929 - ----------------------------------------------------------------------------- Total noninterest expense 4,851 4,124 9,368 8,111 Income before income taxes 1,032 602 1,840 1,047 Provision for income taxes - ----------------------------------------------------------------------------- Net Income $ 1,032 $ 602 $ 1,840 $ 1,047 ============================================================================= Per share (on average shares outstanding): Net Income $ 0.29 $ 0.17 $ 0.52 $ 0.30 Fully diluted net income 0.29 0.17 0.52 0.30 Average number of common and common equivalent shares outstanding 3,580 3,488 3,566 3,484 Fully diluted average common and common equivalent shares oustanding 3,804 3,746 3,790 3,742 See accompanying notes to consolidated financial statements.
2 CONSOLIDATED BALANCE SHEETS Columbia Banking System, Inc.
June 30, December 31, (in thousands) 1996 1995 - ----------------------------------------------------------------------------- Assets Cash and due from banks $ 22,326 $ 18,244 Interest-earning deposits with banks 10,415 12,635 Securities available for sale: U.S. Treasury & Government Agencies 16,734 6,948 Mortgage-backed 11,268 12,446 FHLB stock 4,082 3,281 - ----------------------------------------------------------------------------- Total securities available for sale 32,084 22,675 Loans held for sale 1,950 1,367 Loans 401,554 353,093 Less: allowance for loan losses 4,411 3,748 - ----------------------------------------------------------------------------- Loans, net 397,143 349,345 Interest Receivable 2,893 2,469 Premises and equipment, net 13,532 13,736 Real estate owned 3,304 Other 1,269 1,431 - ----------------------------------------------------------------------------- Total Assets $481,612 $425,206 ============================================================================= Liabilities and Shareholders' Equity Deposits: Noninterest-bearing $ 63,208 $ 52,991 Interest-bearing 339,706 308,884 - ----------------------------------------------------------------------------- Total Deposits 402,914 361,875 Federal Home Loan Bank advances 37,000 25,000 Other borrowings 2,300 Other liabilities 3,252 3,669 Convertible subordinated notes 2,363 2,695 - ---------------------------------------------------------------------------- Total liabilities 447,829 393,239 Shareholders' equity: Preferred stock (no par value) Authorized, 2,000,000 shares; None outstanding June 30, December 31, Common stock (no par value) 1996 1995 --------- ---------- Authorized shares 10,000 10,000 Issued and outstanding 3,482 3,274 33,354 30,806 Retained Earnings 957 1,274 Unrealized losses on securities available for sale (528) (113) - ----------------------------------------------------------------------------- Total shareholders' equity 33,783 31,967 - ----------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $481,612 $425,206 =============================================================================
See accompanying notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Columbia Banking System, Inc.
Common stock Unrealized Total Number of Retained Gains and Shareholders' (in thousands) Shares Amount Earnings (Losses) Equity - ----------------------------------------------------------------------------- Balance at December 31, 1994 3,258 $30,703 ($1,481) ($361) $28,861 Net income 2,755 2,755 Issuance of shares of common stock, net 16 103 103 Change in unrealized gains and (losses) 248 248 - ----------------------------------------------------------------------------- Balance at December 31, 1995 3,274 30,806 1,274 (113) 31,967 Net income 1,840 1,840 Issuance of shares of common stock, net 44 391 391 Issuance of shares of common stock - 5% stock dividend 164 2,157 (2,157) Change in unrealized gains and (losses) (415) (415) - ----------------------------------------------------------------------------- Balance at June 30, 1996 3,482 $33,354 $ 957 ($528) $33,783 =============================================================================
See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS Columbia Banking System, Inc.
Six Months Ended March 31, (in thousands) 1996 1995 - ----------------------------------------------------------------------------- Operating Activities Net income $ 1,840 $ 1,047 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 760 600 Losses (gains) on real estate owned 41 (11) Provision for depreciation and amortization 1,057 588 Net losses (gains) on sale of investing assets 196 (22) Increase in loans held for sale (583) (716) Increase in interest receivable (424) (444) (Decrease) increase in interest payable (12) 438 Net changes in other assets and liabilities (282) 249 - ----------------------------------------------------------------------------- Net cash provided by operating activities 2,593 1,729 Investing Activities Proceeds from maturities of securities available for sale 9,428 Proceeds from maturities of mortgage-backed securities available for sale 807 Proceeds from maturities of mortgage-backed securities 1,220 Purchases of securities available for sale (19,937) Purchases of investment securities (3,546) Loans originated and acquired, net of principal collected (48,785) (54,319) Purchases of premises and equipment (1,045) (4,434) Proceeds from disposal of premises and equipment 140 Proceeds from sale of real estate owned 3,263 13 Other, net (71) - ----------------------------------------------------------------------------- Net cash used by investing activities (56,129) (61,137) Financing Activities Net increase in deposits 41,039 45,016 Net increase in other borrowings 2,300 Proceeds from FHLB advances and other long-term debt 20,800 17,000 Repayment of FHLB advances and other long-term debt (8,800) Proceeds from issuance of common stock 59 16 - ----------------------------------------------------------------------------- Net cash provided by financing activities 55,398 62,032 - ----------------------------------------------------------------------------- Increase in cash and cash equivalents 1,862 2,624 Cash and cash equivalents at beginning of period 30,879 13,658 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of period $32,741 $16,282 ============================================================================= Supplemental information: Cash paid for interest $ 8,614 $ 6,354 Loans foreclosed and transferred to real estate owned Issuance of common stock from conversion of convertible subordinated notes 332 15 See accompanying notes to consolidated financial statements.
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Columbia Banking System, Inc. 1. Basis of Presentation The interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments including normal recurring accruals necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of results to be anticipated for the year ending December 31, 1996. Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 presentation. For additional information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1995. 2. Summary of Significant Accounting Policies In December 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The statement requires the Company to elect to account for stock-based compensation on a fair value basis or an intrinsic value basis. The intrinsic value basis is currently used by the Company and is the accounting principle prescribed by Accounting Principles Board No. 25 "Accounting for Stock Issued to Employees" (APB 25). SFAS 123 requires among other things, disclosure in the footnotes of the pro forma impact on net income and earnings per share of the difference between compensation expense using the intrinsic value method and the fair value method if the fair value method of accounting is not used. The adoption of SFAS 123 is required for the fiscal year ended December 31, 1996. As of June 30, 1996, the Company had not decided which method will be used for fiscal year ending December 31, 1996. 3. Stock Dividend On April 24, 1996, the Company announced a 5% stock dividend payable on May 22, 1996, to shareholders of record on May 8, 1996. On May 22, 1996, 164,051 common shares were issued to shareholders. Average shares outstanding and net income per share have been adjusted to give retroactive effect to the three and six month periods ending June 30, 1995. 4. Redemption of Convertible Subordinated Notes On June 3, 1996, the Company gave notice that it will redeem all of its issued and outstanding 7.85% Convertible Subordinated Notes (Notes). The date of redemption of the Notes is August 1, 1996. Holders of the Notes have the option to convert their Notes into shares of Columbia common stock until 5:00 p.m. Seattle time, on August 1, 1996. The Notes may be converted in whole or in part, in multiples of $1,000 principal amount, at 100% of the principal amount of the Note (or portion thereof), at the conversion price per share of Common Stock of $10.56. 6 CONSOLIDATED AVERAGE BALANCES--NET CHANGES Columbia Banking System, Inc.
Three Months Ended Increase Six Months Ended Increase June 30, (Decrease) June 30, (Decrease) (in thousands) 1996 1995 Amount 1996 1995 Amount - -------------------------------------------------------------------------------- ASSETS Loans $392,018 $310,274 $81,744 $378,281 $296,862 $81,419 Securities 27,959 24,027 3,932 28,329 23,202 5,127 Interest-earning deposits with banks 11,549 1,894 9,655 12,352 2,264 10,088 - -------------------------------------------------------------------------------- Total interest-earning assets 431,526 336,195 95,331 418,962 322,328 96,634 Noninterest-earning assets 29,483 27,471 2,012 29,271 25,851 3,420 - -------------------------------------------------------------------------------- Total assets $461,009 $363,666 $97,343 $448,233 $348,179 $100,054 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $331,894 $263,415 $68,479 $324,327 $254,283 $ 70,044 Federal Home Loan Bank advances 33,095 26,869 6,226 32,170 22,211 9,959 Other borrowings 77 77 84 84 Convertible subordinated notes 2,619 2,734 (115) 2,651 2,735 (84) - -------------------------------------------------------------------------------- Total interest-bearing liabilities $367,685 293,018 74,667 $359,232 279,229 80,003 Noninterest-bearing deposits 57,529 38,814 18,715 53,673 37,687 15,986 Other noninterest-bearing liabilities 2,849 2,487 362 2,854 2,298 556 Shareholders' Equity 32,946 29,347 3,599 32,474 28,965 3,509 - -------------------------------------------------------------------------------- Total liabilities and shareholders'equity $461,009 $363,666 $97,343 $448,233 $348,179 $100,054 ================================================================================
7 MANAGEMENT DISCUSSION AND FINANCIAL REVIEW Columbia Banking System, Inc. Earnings Summary For the second quarter of 1996 the Company recorded net income of $1.0 million, compared with net income of $602,000 in the second quarter of 1995. For the first six months of 1996, net income was $1.8 million, compared with net income of $1.0 million in the first six months of 1995. Second quarter 1996 net income per share was $0.29 increasing from net income per share of $0.17 in the second quarter of 1995, and for the first six months of 1996, the Company recorded net income of $0.52 per share, compared with net income of $0.30 per share for the same period in 1995. Net income for the first half of 1996 was positively affected by an increase in met interest income, service charges on deposit accounts and bank card fees. The Company continues to benefit from utilization of its net operating loss carryforwards for federal income tax purposes. Therefore, the Company has no federal income tax provision for the six months ending June 30, 1996. Had the earnings been fully taxable, net income would have been $1.2 million. Management has determined that in order to successfully pursue the perceived potential for Columbia Bank, it is necessary to establish strategic branch coverage in the Tacoma/Pierce County area. Columbia Bank opened four new branches during 1995, three in Pierce County and one in south King County. Construction began in the first quarter of 1996 on a permanent facility for the Gig Harbor branch. During the second quarter a new Spanaway branch at 176th and Pacific Avenue opened in a temporary facility. The Spanaway office is the tenth branch to open since Columbia Bank's major Pierce County expansion in August 1993, bringing the Company's total number of branches to 14. Columbia Bank will open its next new branch, the Puyallup branch, at the end of the third quarter of 1996. A branch will also be built at Northwest Landing in Dupont, an area of recently announced business expansion. Additional expansion opportunities may include another Puyallup location, the Edgewood/Milton area, and the Stadium and Lincoln business districts of Tacoma. Establishment of new branches and relocation of existing temporary branches can be expected to utilize considerable resources in 1996 and beyond. New branches normally do not contribute to net income for many months after opening. In addition to the ongoing expansion of its branch network, the Bank has added new products and services to give its customers more banking options. During the second quarter, the Bank introduced "Columbia Free Checking". Free checking includes no monthly fees, no minimum balance, no per check charges, free use of any ATM in Washington state, and upon approval, a personalized no fee VISA (registered trademark) debit card. The Bank also launched an alternative investments program through a new department, Columbia Financial Services, which will make available mutual funds, annuities, and other investment products through a contractual arrangement with PrimeVest Financial Services, Inc. Net Interest Income Net interest income for the second quarter of 1996 increased to $5.0 million, or 22.8%, from $4.1 million in the second quarter of 1995. For the first six months of 1996, net interest income increased to $9.5 million, or 19.8%, from $7.9 million for the first six months of 1995. The increase in net interest income in the second quarter and for the first six months of 1996 is largely due to the overall growth of the Company. Net interest income in the first half of 1996 was favorably affected by average interest-earning assets increasing more rapidly than average interest-bearing liabilities, with the difference funded by noninterest-bearing deposits and shareholders' equity. Specifically, average interest-earning assets for the second quarter and for the first six months of 1996 increased $95.3 million and $96.6 million, respectively, compared with the same periods in 1995, while average interest-bearing liaiblities increased only $74.7 million and $80.0 million, compared with the same periods in 1995. The 1996 increase in average interest-earning assets and average interest-bearing liabilities is primarily due to the ongoing expansion of Columbia Bank. 8 Net interest margin (net interest income divided by average interest-earning assets) decreased to 4.65% in the second quarter of 1996 from 5.03% in the second quarter of 1995. For the first six months, net interest margin decreased to 4.55% in 1996 from 4.96% in 1995. The decrease in net interest margin is primarily the result of growth in earning assets at reduced spreads. While interest-earning assets grew, the average yield decreased to 8.65%, or 0.63% for the second quarter of 1996 from 9.28% in the same period in 1995. For the first six months of 1996, the average yield decreased to 8.66%, or 0.55% from 9.21% in the same period in 1995. In comparison, the average cost of interest-bearing liabilities decreased to 4.70%, or 0.36% for the second quarter of 1996 from 5.06% in the same period of 1995, and during the first six months of 1996, the average cost of interest-bearing liabilities decreased to 4.80%, or 0.10% from 4.90% in the same period of 1995. The decrease in net interest margin and spread is the result of increased competition in the Company's market. Noninterest Income and Expense Total noninterest income increased $358,000, or 37.7%, in the second quarter of 1996, and $640,000, or 34.9%, for the first six months of 1996, compared with the same periods in 1995. Increases in noninterest income in the first half of 1996 were centered in account service charges, bank card revenue, and mortgage banking income. Total noninterest expense increased $727,000, or 17.6%, in the second quarter of 1996, and $1.3 million, or 15.5%, in the first six months of 1996 compared with the same periods in 1995. The increase is primarily due to expenses associated with the expansion of Columbia Bank. Total noninterest expense was 76.8% and 78.3% of total revenues (the sum of net interest income plus noninterest income less nonrecurring gains) for the second quarter and first six months of 1996, respectively, and 82.1% and 83.1% for the same periods in 1995. Increases in noninterest expense are centered in occupancy, advertising, business & occupation taxes, data processing and other expense. In general, increases in noninterest expense are due to the growth of the Company and the associated "volume driven" expenses. Total noninterest expense for the Company is expected to decline in relation to revenues as the Company pursues its commitment to more efficient operations and as projected asset growth materializes. In February 1996, the Company recorded a loss of $41,000 on the sale of its "real estate owned" (which consisted of one property in the state of Washington). Also, in March 1996, the Company recorded a loss of $38,000 on a branch real estate transaction. In June 1996, the Company wrote-off $135,000 due to the abandonment of a potential branch site. 9 Loan Portfolio Following is a summary of loans by type:
June 30, December 31 (in thousands) 1996 1995 - ----------------------------------------------------------------------------- Real estate: One-to four-family residential $ 69,364 $ 67,991 Five or more family residential and commercial properties 117,486 97,103 - ----------------------------------------------------------------------------- Total real estate 186,850 165,094 Real estate construction: One-to four-family residential 23,870 22,741 Five or more family residential and commercial properties 10,466 8,884 - ----------------------------------------------------------------------------- Total real estate construction 34,336 31,625 Commercial business 132,251 113,775 Consumer 48,547 43,343 - ----------------------------------------------------------------------------- Sub-total loans 401,984 353,837 Less: Deferred loan fees (430) (744) - ----------------------------------------------------------------------------- Total loans $401,554 $353,093 ============================================================================= Loans held for sale $ 1,950 $ 1,367 =============================================================================
Total loans increased $48.5 million, or 13.7%, to $401.6 million at June 30, 1996 from year-end 1995. All loan categories contributed to the increase. The category of five or more family residential and commercial real estate loans increased $20.4 million, or 21.0%, from year-end, while five or more family residential and commercial real estate construction loans increased $1.6 million, or 17.8%, from year-end. Commercial business loans increased $18.5 million, or 16.2%, to $132.3 million at June 30, 1996 from $113.8 million at December 31, 1995. Consumer loans increased $5.2 million, or 12.0%, from year-end. The increases are primarily the result of Columbia Bank's continued expansion in the Tacoma/Pierce County market, accompanied by strong loan demand. Commercial business loans and consumer loans will likely continue to represent an increasing proportion of the total loan portfolio as a result of the expansion of Columbia Bank in Pierce County. At June 30, 1996, the Company had no foreign loans or loans related to highly leveraged transactions. 10 Nonperforming Assets Below is an analysis of the composition of the Company's nonperforming assets which consist of nonaccrual loans, restructured loans and real estate owned ("REO").
June 30, December 31, (in thousands) 1996 1995 - ----------------------------------------------------------------------------- Nonaccrual: One-to four-family residential $ 123 $ 329 Commercial business 472 86 Consumer 81 20 - ----------------------------------------------------------------------------- Total $ 676 $ 435 ============================================================================= Restructured: One-to four-family residential $ 27 $ 29 Commercial business 42 - ----------------------------------------------------------------------------- Total $ 69 $ 29 ============================================================================= Real estate owned: Five or more family residential and commercial properties $3,304 - ----------------------------------------------------------------------------- Total $3,304 ============================================================================= Total nonperforming assets $ 745 $3,768 =============================================================================
The current policy of the Company generally is to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status. Total nonperforming loans were $745,000, or 0.19%, of total loans (excluding loans held for sale) at June 30, 1996, compared with $464,000, or 0.13%, of total loans at December 31, 1995. In February 1996, the Company sold all of its "real estate owned" (which consisted of one property in the state of Washington), thus reducing total nonperforming assets to $745,000 or 0.19% of total loans (excluding loans held for sale) at June 30, 1996, from $3.8 million, or 1.1% of total loans at year-end 1995. 11 Provision and Allowance for Loan Losses Net loan charge-offs amounted to $31,000 and $94,000 for the second quarter and for the first six months of 1996, respectively, compared with net loan charge-offs of $141,000 and $142,000 for the same periods in 1995. The Company's provision for loan losses was $430,000 for the second quarter of 1996, compared with $300,000 for the second quarter of 1995. For the first six months of 1996, the provision amounted $760,000, compared with $600,000 for the first six months of 1995. During the first six months, the allowance for loan losses increased by $663,000, increasing to 1.10% of loans at June 30, 1996 from 1.06% of loans (excluding loans held for sale) at December 31, 1995. Management considers the allowance for loan losses at June 30, 1996 to be adequate to cover anticipated loan losses based on management's assessment of various factors affecting the loan portfolio, including the level of problem loans, business conditions, estimated collateral values, loss experience and credit concentrations. The following table summarizes the changes in the allowance for loan losses for the six months ended June 30, 1996 and 1995:
Three Months Ended Six Months Ended June 30, June 30, (in thousands) 1996 1995 1996 1995 - ---------------------------------------------------------------------------- Beginning balance $4,015 $3,010 $3,748 $2,711 Charge offs: Commercial business (18) (145) (44) (144) Consumer (24) (17) (63) (31) - ---------------------------------------------------------------------------- Total charge-offs (42) (162) (107) (175) Recoveries: Commercial business 11 16 13 28 Consumer 5 5 - ---------------------------------------------------------------------------- Total recoveries 11 21 13 33 - ---------------------------------------------------------------------------- Net (charge-offs) recoveries (31) (141) (94) (142) Provision charged to expense 430 300 760 600 - ---------------------------------------------------------------------------- Ending balance $4,414 $3,169 $4,414 $3,169 ============================================================================
Liquidity and Sources of Funds The Company's primary sources of funds are customer deposits and advances from the Federal Home Loan Bank (the "FHLB"). These funds, together with loan repayments, loan sales, retained earnings, equity and other borrowed funds, are used to make loans, to acquire securities and other assets, and to fund continuing operations. Total deposits increased 11.3% to $402.9 million at June 30, 1996 from $361.9 million at December 31, 1995. FHLB advances increased $12.0 million during the first six months of 1996 to $37.0 million. Management anticipates that the Company will continue to rely on the same sources of funds in the future and will use those funds primarily to make loans and purchase securities. Management determined that in order to successfully pursue the perceived potential for Columbia Bank, it is necessary to establish broad branch coverage in the Tacoma/Pierce County area and hire experienced bank personnel. To fund the growth of the Company, management's strategy has been to make use of brokered and other wholesale deposits while working to build "core" deposits as rapidly as practical. Brokered and wholesale deposits can be more expensive and more volatile in comparison with core deposits obtained in the Company's market area. The deposit increase of $41.0 million during the first six months of 1996 occurred entirely in "core deposits". Brokered and other wholesale deposits (excluding public deposits) decreased $13.2 million to $35.1 million, or 8.7% of total deposits at June 30, 1996, from $48.3 million, or 13.3% of total deposits at December 31, 1995. 12 Capital Shareholders' equity at June 30, 1996 was $33.8 million compared with $32.0 million at December 31, 1995. The increase is primarily due to improved net income during the first six months of 1996. Shareholders' equity was 7.0% and 7.5% of total period-end assets at June 30, 1996 and December 31, 1995, respectively. Banking regulations require bank holding companies to maintain a minimum "leverage" ratio of core capital to adjusted quarterly average total assets of at least 3%. At June 30, 1996, the Company's leverage ratio was 7.30%, compared with 7.72% at December 31, 1995. In addition, banking regulators have adopted risk-based capital guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common shareholders' equity, less goodwill and certain identifiable assets, while Tier II capital includes the allowance for loan losses and subordianted debt, both subject to certain limitations. Regulatory minimum risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8%. The Company's Tier I and total capital ratios were 8.58% and 10.30%, respectively, at June 30, 1996, compared with 9.10% and 10.95%, respectively, at December 31, 1995. During 1992, the Federal Deposit Insurance Corporation (the "FDIC") published the qualifications necessary to be classified as a "well capitalized" bank, primarily for assignment of FDIC insurance premium rates beginning in 1993. To qualify as "well capitalized," banks must have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at least 5%. Columbia Bank qualified as "well capitalized" at June 30, 1996. In addition, in accordance with the 1993 order by the FDIC granting insurance for the deposits of Columbia Bank, the Bank is required to obtain a leverage ratio of 8% by August 16, 1996. Management is confident that this required ratio will be achieved. Under Washington State banking regulations, Columbia Bank's ability to declare or pay dividends to the Company is limited to the amount of the Bank's profits then on hand, less any required transfers to additional paid-in capital. The Company's ability to pay dividends is substantially dependent upon receipt of dividends from the Bank. The Company presently intends to retain earnings to support anticipated growth. Accordingly, the Company does not intend to pay cash dividends on its common stock in the foreseeable future. On April 24, 1996, the Company announced a 5% stock dividend payable on May 22, 1996, to shareholders of record on May 8, 1996. On May 22, 1996, 164,051 common shares were issued to shareholders. Average shares outstanding and net income per share have been adjusted to give retroactive effect to the three and six month periods ended June 30, 1995. The retroactive impact on earnings per share for the three months and six months ended June 30, 1995, is a reduction of $.01 per share and $.02 per share, respectively. At June 3, 1996, the Company gave notoce that it will redeem all of its issued and outstanding 7.85% Convertible Subordinated Notes (Notes). The date of redemption of the Notes is August 1, 1996. Holders of the Notes have the option to convert their Notes into shares of Columbia common stock until 5:00 p.m. Seattle time, on August 1, 1996. The Notes may be converted in whole or in part, in multiples of $1,000 principal amount, at 100% of the principal amount of the Note (or portion thereof), at the conversion price per share of Common Stock of $10.56. If all the Notes outstanding at June 30, 1996 are converted to common stock, approximately 223,769 new shares will be issued. 13 PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual shareholders meeting on April 24, 1996, for the purpose of electing a Board of Directors. All fourteen persons nominated were elected to hold office for the ensuing year.
Nominee Votes in Favor Votes Withheld - -------------------------------------------------------------------------------- W. Barry Connoley 2,958,977 1,407 Richard S. DeVine 2,959,377 1,007 A. G. Espe 2,960,377 7 Jack Fabulich 2,960,377 7 Jonathan Fine 2,960,377 7 Margel S. Gallagher 2,959,377 1,007 John A. Halleran 2,960,377 7 W. W. Philip 2,960,377 7 John H. Powell 2,959,964 420 Richard E. Quoidbach 2,959,927 457 Donald Rodman 2,960,376 8 Frank H. Russell 2,959,377 1,007 Sidney R. Snyder 2,959,977 407 James M. Will 2,960,377 7
14 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit 11 - Computation of Fully Diluted Earnings per Common Share See Exhibit 27 - Financial Data Schedule (b) On April 30, 1996, the Company filed a Form 8-K reporting that W.W. Philip, the Company's President and Chief Operating Officer had agreed to remain in his present position with the Company and its subsidiary bank for two additional years, through the end of calendar year 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COLUMBIA BANKING SYSTEM, INC. (Registrant) Date July 31, 1996 By /s/ A. G. Espe ----------------------------- ----------------------------- A. G. Espe Chairman and Chief Executive Officer Date July 31, 1996 By /s/ Gary R. Schminkey ----------------------------- ----------------------------- Gary R. Schminkey Senior Vice President and Chief Financial Officer (Principal Financial Officer) 15 Exhibit 11 Computation of Fully Diluted Earnings per Common Share Columbia Banking System, Inc.
Three Months Ended Six Months Ended June 30, June 30, (in thousands, except per share data) 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Earnings Net income applicable to common stock $1,032 $602 $1,840 $1,047 Interest on convertible subordinated notes, net of income tax effects--Note 1 58 62 118 123 - -------------------------------------------------------------------------------- Pro forma net income available to common stock $1,090 $664 $1,958 $1,170 ================================================================================ Shares Weighted average number of common and common equivalent shares outstanding 3,580 3,488 3,566 3,484 Additional shares assuming conversion of convertible subordinated notes--Note 1 224 258 224 258 - -------------------------------------------------------------------------------- Pro forma shares 3,804 3,746 3,790 3,742 ================================================================================ Fully diluted earnings per share - as reported $0.29 $0.17 $0.52 $0.30 ================================================================================ Fully diluted earnings per share - as calculated $0.29 $0.18 $0.52 $0.31 ================================================================================
Note 1. Earnings per share and fully diluted earnings per share are reported as the same for the three months and six months ended June 30, 1995. The inclusion of convertible subordinated notes would produce an antidilutive effect. Additional average shares, assuming the conversion of convertible subordinated notes, represent 257,529 shares for the three months and six months ended June 30, 1995. The related interest expense on these notes (net of income tax effects) was $61,500 and $123,002 for the three months and six months ended June 30, 1995. For additional information on earnings per share, please see the "Capital" section of the "Management Discussion and Financial Review". EX-27 2
9 FINANCIAL DATA SCHEDULE Columbia Banking System, Inc. (in thousands except per share) 0000887343 COLUMBIA BANKING SYSTEM, INC. 1000 $ 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 22326 10415 0 0 32084 0 0 401554 4411 481612 402914 4663 3252 37000 0 0 33354 429 481612 16943 826 328 18097 7593 1009 8602 760 0 9368 1840 1840 0 0 1840 .52 .52 4.55 676 260 69 0 3748 107 13 4414 4414 0 766
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